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While several issues in the financial-services reform bill, passed by the Senate last week, are worrisome to the commercial real estate industry, its flexible risk retention provisions for commercial mortgage-backed security loans are a relief. These allow U.S. regulators to choose the best form of risk retention for commercial real estate finance. The legislation could provide a boost to the CMBS market, says Brendan Reilly, head of government relations for the Commercial Real Estate Financial Council.

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Rating agencies say some of the nearly $120 billion in commercial mortgage-backed securities loans maturing through 2018 will face challenges in refinancing. S&P Global Ratings predicts that $12 billion of the $92 billion of loans maturing during 2017 may default, while Morningstar Credit Ratings notes that the risk-retention rule will reduce liquidity and Kroll Bond Rating Agency predicts declines in new issues.

Upcoming risk-retention requirements, set to go into effect Dec. 24, are expected to hamper commercial mortgage-backed securities bond sales this year, which are already underperforming by 50% compared to last year. Issuers and investors have not yet determined how to structure a CMBS that complies with the new regulation.

The House of Representatives has passed legislation that could relieve some of the more onerous provisions of the Dodd-Frank Act's credit risk-retention rule, which takes effect at the end of this year and is expected to limit commercial mortgage-backed securities lending. Last week, the Senate held a hearing about these issues as it considers its own legislation.

While several issues in the financial-services reform bill, passed by the Senate last week, are worrisome to the commercial real estate industry, its flexible risk retention provisions for commercial mortgage-backed security loans are a relief. These allow U.S. regulators to choose the best form of risk retention for commercial real estate finance. The legislation could provide a boost to the CMBS market, says Brendan Reilly, head of government relations for the Commercial Real Estate Financial Council.

Commercial mortgage-backed security loans requiring special servicing totaled $81.7 billion in the first quarter -- an increase from the $74 billion in need of special servicing at the end of 2009, according to Fitch Ratings. Increasingly, special servicers are using bulk-note sales, modifying the loans into higher-rated notes and providing forbearance, according to Stephanie Petosa, managing director at Fitch Ratings. "However, the majority of the loan workouts remain within the more traditional realm of extensions, modifications and foreclosures," she said.